Israel's War against Tax Planning

April 2009

Dr. Avi Nov, Adv.

Israel is now focusing on combating tax planning. In recent years, Israel has taken significant measures to strengthen the effort to fight tax evasion and avoidance.

In 2003, Article 75b was added to the Income Tax Ordinance (hereinafter: ITO), to deal with controlled foreign companies (hereinafter: CFC). The purpose of the Israeli CFC rules is to tax the controlling members of the CFC who are Israeli residents as if dividends were actually distributed to them.

The CFC rules introduce the concept of ‘deemed dividend’ to controlling Share holders (Israeli residents holding 10% or more of the means of control) for unpaid profits of controlled foreign companies of which 50% of the control is being held by Israeli residents.

In 2006, a chapter was added to the ITO, dealing with the taxation of income produced through the use of local and foreign trusts, and which includes various obligations and expanded reporting requirements (section 75(c) – (r) of the ITO).

The legislation imposes a duty to report to the tax authority with regard to a series of transactions that have been determined to constitute reportable tax planning, including transactions with related bodies, payment of debts to related bodies, the purchase or holding of control of companies that are resident in countries with which Israel does not have a tax convention or the receipt of funds from such companies, as well as the purchase or holding of the means of control in companies that are resident in countries with which Israel does have tax conventions and most of whose assets are located in Israel, or the receipt of funds from such companies.

The ITO intends also to combat treaty shopping.

Most importantly, Israeli tax law provides for the careful examination of transactions and actions are carefully examined during the assessment process. Israeli tax law provides that the assessing officer may ignore artificial or fictional transactions or transactions the main purpose of which is the inappropriate avoidance or reduction of tax.

Dr. Avi Nov Law Offices, Israeli & international tax law

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*This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion